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ABB: Good finish to the year

Feb 20, 2008

Performance summary

Sales grow 29% YoY during 4QCY07, 39% YoY during the full year (December ending fiscal); power systems and automation products lead growth drivers. CY07 sales 6% lower than our estimates.

Operating margins expand by 0.5% in 4QCY07, 1% during CY07 - improvement due to lower raw material and staff costs (both as percentage of sales).

Net profits grow 45% YoY in CY07, largely aided by expansion in operating margins as other income records a decline. Profits 3% lower than our estimates.

Board recommends a dividend of Rs 2.2 per share for CY07 (dividend yield of 0.2%)

Financial performance snapshot

(Rs m)

4QCY06

4QCY07

Change

CY06

CY07

Change

Sales

14,263

18,394

29.0%

42,740

59,303

38.8%

Expenditure

12,316

15,792

28.2%

37,973

52,057

37.1%

Operating profit (EBDITA)

1,947

2,602

33.7%

4,767

7,246

52.0%

Operating profit margin (%)

13.6%

14.1%

11.2%

12.2%

Other income

174

254

45.7%

737

710

-3.6%

Interest

1

20

1710.3%

7

68

839.2%

Depreciation

71

82

14.7%

265

324

22.4%

Profit before tax

2,049

2,755

34.5%

5,232

7,565

44.6%

Extraordinary income/(expense)

-

-

-

-

Tax

699

947

35.4%

1,829

2,648

44.8%

Profit after tax/(loss)

1,350

1,808

34.0%

3,403

4,917

44.5%

Net profit margin (%)

9.5%

9.8%

8.0%

8.3%

No. of shares

211.9

Diluted earnings per share (Rs)

23.2

P/E ratio (x)

54.1

What has driven performance in CY07?

Automation division led ABB’s topline performance during the full year ended December 2007. This business, which is further sub-divided into two segments (process and products), grew its sales by 45% YoY during the fiscal, thereby increasing its share in ABB’s total sales to 38% (36% in CY06). The company’s power division (systems and products) also recorded a strong growth of 34% YoY in sales during CY07.

Segment-wise performance

(Rs m)

4QCY06

4QCY07

Change

CY06

CY07

Change

Power systems

Revenue

5,453

7,402

35.7%

16,919

22,514

33.1%

% share

35.7%

37.5%

37.0%

35.6%

PBIT margin

14.7%

13.0%

10.4%

10.3%

Power products

Revenue

3,878

4,874

25.7%

12,130

16,326

34.6%

% share

25.4%

24.7%

26.5%

25.8%

PBIT margin

15.8%

17.0%

11.4%

13.0%

Process automation

Revenue

3,011

3,126

3.8%

7,317

10,666

45.8%

% share

19.7%

15.9%

16.0%

16.9%

PBIT margin

10.2%

14.4%

11.6%

12.5%

Automation products

Revenue

2,857

4,159

45.6%

9,179

13,332

45.2%

% share

18.7%

21.1%

20.1%

21.1%

PBIT margin

15.0%

14.9%

12.5%

13.4%

Others

Revenue

63

158

149.4%

147

344

134.3%

% share

0.4%

0.8%

0.3%

0.5%

PBIT margin

10.3%

6.3%

6.4%

3.6%

Total*

Revenue

15,263

19,720

29.2%

45,693

63,182

38.3%

PBIT margin

14.1%

14.6%

11.3%

12.0%

* Excluding inter-segment adjustments

Growth in both these segments was on the back of robust order booking and execution throughout the year. During the year, for instance, ABB recorded an order inflow of Rs 77 bn, which was 36% higher than the orders booked in CY06. At the end of December 2007, the company’s unexecuted orderbook stood at Rs 50 bn, which is around 85% of its full year sales in CY07. As indicated in the press release, ABB received several orders for rural and urban electrification driven by new power capacity additions as well as strengthening of transmission and distribution systems. On the automation front, the company received major orders from sectors like steel, non-ferrous metals, pulp & paper, cement, oil & gas and building applications.

ABB’s operating margins expanded by 0.5% in 4QCY07 and 1% in CY07. This improvement was entirely due to lower raw material and staff costs (both as percentage of sales) as other costs increased marginally. Based on segments, power products and power systems recorded the best and worst performance in terms of PBIT margins during the year.

On the back of improvement in operating margins, ABB recorded a 45% YoY growth in its bottomline during CY07, which was a tad better than its topline performance, which was largely a result of expansion in operating margins. The bottomline performance would have been even better but for a marginal decline in other income and higher interest outgo.

What to expect?

At the current price of Rs 1,255, the stock is trading at a multiple of 25.6 times our estimated CY09 earnings. ABB’s CY07 performance has been almost in line with our estimates (just a marginal underperformance as mentioned above). The company continues to book key orders in both the power and automation spaces (the latest being a Rs 3.3 bn substation order from Power Grid). What is also important to note is the fact that the company’s global parent has reiterated the importance that Indian operations play in its overall growth plan. In fact, the parent company expects the business volumes for ABB India to double by 2010 and plans to invest an additional US$ 100 m (after a recent investment of US$ 100 m) for capacity and range expansion over the next 2-3 years to support this growth. This we believe is a positive for the Indian entity. We shall soon update our research report on the company incorporating CY07 actual numbers and estimates for CY10.

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